Flood Insurance: Why Don’t People Buy It?

The author is a member of the PPIC Water Policy Center research network.

Flood damage has been increasing in the US, largely due to where we build. Climate scientists are concerned that as the climate warms, there will be more intense downpours, stronger hurricanes, and rising seas, all of which could increase flood risk. Despite this, people have been dropping flood insurance nationwide. The number of policies from the National Flood Insurance Program (NFIP)—the main provider of flood coverage in the US—has been falling since 2011, perhaps due to changes in pricing. But Californians have recently bucked the trend. The Federal Emergency Management Agency (FEMA) reports that flood insurance sales in the state are up 12 percent this winter (compared to 3 percent last fall) as residents prepared for possible El Niño flooding.

This increase in California is all the more notable since, generally speaking, most people don’t voluntarily buy disaster insurance. Low demand for flood insurance led Congress, early in the history of the NFIP, to make purchase mandatory for homes located in a FEMA-mapped 100-year floodplain that had a mortgage from a federally backed or regulated lender. Yet just half of these homes are insured, with more in coastal areas. Outside the 100-year floodplain, even where there is flood risk, few homes are insured.

So why don’t more people buy disaster insurance? People may think floods won’t happen to them. Insurance may be too expensive, or they may believe it isn’t worth it. They may be uninformed about flood risks. People seem to insure when recent events raise awareness about the risks. My recent research shows that a federal requirement for disaster-aid recipients to purchase flood coverage explains much of this increase.

For people living in a floodplain or behind a levee, flood coverage is important well beyond El Niño. Yet past experience suggests many newly insured Californians will not keep their policies after El Niño passes. Many NFIP policies are dropped in a few years; only a third of policies are held for six years or longer. Although some of this can be explained by people moving, fading concern about floods is likely also a factor. In 1998—a year after California’s last widespread flooding—flood insurance sales were at an all-time high of nearly half a million policies. Ten years later, that number had fallen by half.

Several policy changes could encourage more at-risk households to insure. Informing residents of the likelihood of flooding, potential damage, and the limitations of disaster aid can help them make better decisions. FEMA outreach at times of increased risk, such as El Niño events or after major wildfires, can help alert homeowners to times when coverage may be warranted. Finally, a recent report from the National Research Council addressed ways to help lower premiums when insurance is too costly for low- or middle-income families in risky locations.

After major flooding, such as occurred recently in South Carolina, the news often reports that many victims of flooding were not insured. Analyses of take-up rates for flood insurance corroborate these news accounts, suggesting that, on average, roughly half of people in 100-year floodplains purchase flood insurance.